On Friday, December 7, the Delaware Supreme Court (the “DSC”), in an order that was as parsimonious with its word count as the Court of Chancery was profuse, unanimously upheld the Court of Chancery’s holding that Fresenius Kabi AG was entitled to walk away from its $4.3 billion merger with Akorn, Inc. on the basis that Akorn had experienced a material adverse change (a “MAC”) – the first time a Delaware court has permitted a buyer to terminate a merger on MAC grounds.
In the concise three-page order, DSC Chief Justice Leo E. Strine upheld the lower court’s decision for two “specific reasons”:
- First, the DSC found that the factual record, when applying In re IBP, Inc. Shareholders Litigation and Hexion Specialty Chemicals, Inc. v. Huntsman Corp., “adequately supported” the determination that Akorn had suffered a MAC excusing Fresenius’s obligation to close the merger.
- Second, the DSC concluded that the record “adequately supported” the Court of Chancery’s determination that Fresenius properly terminated the merger because Akorn’s breach of its regulatory representations and warranties gave rise to a MAC, and Fresenius itself was not in material breach of its obligations such that Fresenius would have been prevented from exercising its termination right under the merger agreement.
Because the DSC affirmed the Court of Chancery on these “specific reasons” (emphasizing that the DSC Justices “need not and do not address every nuance of the complex record”), it rendered a substantial portion of the Chancery Court’s tome dicta. For example, the DSC’s order did not address whether Chancellor Laster’s interpretation of IBP and Huntsman was appropriate or any of the other holdings of the Akorn Chancery Court opinion, including the finding that Akorn had materially breached the merger agreement’s ordinary course interim operating covenant.
Key takeaways for practitioners and deal parties:
- As we have noted previously, the facts matter, and here, the lower court found (and therefor deference was paid to) the conclusion that the facts in this case were really, really egregious.
- As noted above, seminal MAC cases – IBP/Tyson and Huntsman/Hexion – remain good law and are endorsed by the DSC as the test to be applied to determine the occurrence of a MAC.
- Indeed, the DSC’s Order does not clarify questions raised in Akorn’s appeal brief concerning whether risks that were “known” to the acquirer may constitute a MAC or whether targets may attempt to “disclose against” the MAC definition (akin to disclosing against the representations and warranties) those risks that were made known to the buyer in due diligence, in marketing materials or in the data room prior to signing.
- It is too early to say whether Akorn will stand alone on its facts, or whether it will be ascribed the status of IBP/Tyson and Huntsman/Hexion in Delaware MAC jurisprudence. Since Vice Chancellor Laster’s framework for understanding internal and external risk was neither specifically endorsed nor rejected, advisors will need to carefully review the MAC definition and consider how to best refine its exceptions (and the exceptions from the exceptions) based on the risks faced by their clients.
For more on the Court of Chancery’s opinion, see the Freshfields briefing at http://transactions.freshfields.com/post/102f36y/big-mac-whopper-or-just-a-nothing-burger